Lehman Brothers was founded in 1844 and survived many financial crises until filing for bankruptcy in 2008. Its collapse was due to excessive risk taking including subprime mortgage lending and leverage. This caused liquidity problems and global market turmoil, with impacts like money market funds breaking the buck and commercial real estate price depreciation. The bankruptcy exacerbated the late 2000s financial crisis and recession.

1. History of Lehman Brothers
 Founded by German  Lehman survived them all:
immigrant Henry  The railroad bankruptcies
Lehman in of the 1800s, The Great
Depression of the
Montgomery, Alabam 1930s, two world wars, a
a, in 1844. capital shortage when it
was spun off by American
Express in 1994, and
 In 1850, Henry the Long Term Capital
Lehman and his Management collapse and
brothers, Emanuel Russian debt default of
and Mayer, founded 1998.
Lehman Brothers

2. Introduction
 The disorderly and costly nature of the LBHI
bankruptcy the largest, and still
ongoing, financial bankruptcy in U.S. history
contributed to the massive financial disruption
of late 2008.
 The collapse of Lehman Brothers Holdings Inc.
(LEH) had a crippling effect on the global
economy with the financial crisis escalating to
other parts of the world. In the aftermath of
this event, financial institutions froze lending
activities thereby creating liquidity problems in
the shadow banking financial system.

3.  According to the World Bank, the
economic recession hit USA and the
world at large in three phases
 Phase 1- U.S.-subprime-mortgage-
cum-structured-finance catastrophe .
 Phase 2- Post-Lehman global financial
market turmoil
 Phase 3- The worldwide economic
recession

4. Prime Culprit
 In 2003 and 2004, Lehman acquired five
mortgage lenders, including
subprime lender BNC Mortgage and
Aurora Loan Services, which specialized
in Alt-A loans (made to borrowers
without full documentation)

5. Reasons behind the collapse
 Subprime boom
 The Real state Bubble

6. Reasons behind the
collapse
 Asset-backed securities (ABS) and Collateral debt
obligations(CDOs)
 Lehman underwrote mortage-backed securities more than
any other firm, accumulating an $85-billion portfolio, or four
times its shareholders' equity
 Leverage levels up to 20-35 percent of their equity capital in
order to invest on securitized products using debt capital
 Excessive risk-taking
 Passing the investment risks through unregulated ‘credit
default swaps’ (CDS) where they didn’t have any adequate
capital behind them.(AIG case)
 Weakness of the FED to recognize the economic
catastrophe that Lehman Brothers bankruptcy would cause.

7. IMPACT
 At the time when  After the Lehman
LEH filed for Brothers had filed
bankruptcy, the for bankruptcy in the
Lehman Brothers’ US, the financial
worth was estimated markets in the
at $639 billion while country nearly
on the other hand collapsed when the
the Lehman Washington Mutual
Brothers were $613 failed, a double
billion in debt. tragedy for the
American economy

8. IMPACT
 Due to their extensive global imprint on the
debt, equity and derivatives markets, the
Lehman Brothers had subsidiaries all over
the world.
 Consequently, these global subsidiaries
and companies affiliated to the Lehman
Brothers also filed for financial insolvency
hence catalyzing the traumatic as well as
catastrophic effects of the global economic
recession on financial markets worldwide

9.  The Dow Jones closed down just over 500
points (−4.4%) on September 15, 2008, at
the time the largest drop by points in a
single day since the days following the
attacks on September 11, 2001.
 Lehman's bankruptcy is expected to cause
some depreciation in the price of
commercial real estate. The prospect for
Lehman's $4.3 billion in mortgage
securities getting liquidated sparked a
selloff in the commercial mortgage-backed
securities (CMBS)

10.  Several money funds and institutional
cash funds had significant exposure to
Lehman with the institutional cash fund
run by The Bank of New York
Mellon and the Primary Reserve Fund, a
money-market fund, both falling below
$1 per share, called "breaking the
buck", following losses on their holdings
of Lehman assets

11.  Putnam Investments, a unit of
Canada's Great-West Life co, shut a $12.3
billion money-market fund as it faced
"significant redemption pressure" on
September 17, 2008.
 Lehman Brothers International held close
to 40 billion dollars of clients assets when it
filed for Chapter 11 Bankruptcy. Of this, 22
billion had been re-hypothecated.

12.  In Japan, banks and insurers
announced a combined 249 billion yen
($2.4 billion) in potential losses tied to
the collapse of Lehman. Mizuho Trust &
Banking Co. cut its profit forecast by
more than half, citing 11.8 billion yen in
losses on bonds and loans linked to
Lehman.

13. Controversies
 Controversy of executive pay during
crisis.
 Accounting manipulation
 Section 363 Sale

14. Actions Taken
 LBHI filed a petition under Chapter 11 of
the US bankruptcy code.
 Its US broker-dealer subsidiary was
acquired by Barclays a few days later.

15. This box discusses three particular market
implications linked to the failure of Lehman Brothers
that had the potential to cause systemic liquidity
disturbances:
(1) the impact on the CDS market;
(2) the liquidation of money market funds due to
losses suffered on Lehman debt; and
(3) the consequences of the bankruptcy for the
company's prime brokerage clients.

16. Conclusion
 . Lehman's bankruptcy led to more than
$46 billion of its market value being
wiped out.
 Its collapse also served as the catalyst
for the purchase of Merrill Lynch by
Bank of America in an emergency deal
that was also announced on September
15.